Currency 2.0: Trust Has Been Verified

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A traditional Russian proverb that became popular during the Reagan administration was “Trust but Verify.” It was part of the change journey that helped end the Cold War. The adoption of digital payments or digital “cash” has probably been the slowest of the Internet Age technologies. This was probably due to the lack of a simple, consumer oriented way to verify trust.

The first wave of digital payment technologies dates back to initiatives in late 90’s with now unfamiliar names such as JEPI (Joint Electronic Payment Initiative), DigiCash, CyberCoin and Millicent. They faded and disappeared without much notice due to the lack of widespread adoption. As with most failed initiatives it had less to do with technology and more to do with a failed change journey.

Today, Digital Payments Networks (DPN) are evolving and beginning to gain widespread acceptance. DPNs allow two (or more) parties to settle a transaction outside or in collaboration with traditional financial systems. The road to acceptance is based on evolving levels of the amount “trust” and visibility they receive. In Hollywood, they say there is no such thing as bad publicity. The shutdown of alleged on-line drug broker SilkRoad (“A guide to the Silk Road shutdown”) catapulted Bitcoin, an online payment system into the media spotlight. SilkRoad founders and clients trusted the peer-to-peer payment network to use it as their primary transaction model.

In traditional payment models trust is based on the belief system of each party. That belief is founded on the principle that the currency (Euros, Pounds, Dollars, Yen) is “good” because it is supported or underwritten by a government. Any type of EFT (Electronic Funds Transfer) via Credit/debit, Bank Payments, Wire Transfer etc. works under roughly the same principle. An institution or government “backs” or guarantees the transaction will be settled over electronic clearing networks that have developed in the last century.

The New York Times’ article “Bitcoin Pursues the Mainstream” touches on some important points regarding acceptance of digital payments. I think it misses the “a ha” moment by not taking the issue of “trust” deep enough. Trust is made up of many components between two parties transparency, honesty, skill, experience, reputation, fairness and more.

All of those points may be rolled into two broad categories of Trust – Character and Competency. Character tells us that party offering the payment is reliable and in the context of payments has a history of settling transactions. Competency, in this scenario refers to the parties’ ability to settle the payment in a competent and timely fashion.

Our definition of Trust in the context of digital payments is evolving. We can extend the traditional payment Trust model to a digital model, where Character equates to Social acceptance and advances in Technology enable Competency.

(Uncover) How Did We Gain Trust?

DPNs are a social and technological transformation of the status quo. Over the last 20 years people have become accustom to “trading” (financially or socially) online. Money and wealth are important to us since they represent our ability to secure certain basic human needs such as food, shelter and clothing. The change journey that moves us to trust on a highly anonymous network of machines and payment networks was a difficult one. Without the rise of social networks and the norming of personal information sharing, it’s highly unlikely we’d see a revival of DPN. In a few short years we’ve become comfortable with sharing our identity and financial information anonymously. Social networks have evolved our notions of how, what and when we share information. The next evolution of that trust is learning to manage/protect our Social Identity (Protecting Your Social Identity: Six Steps to Saving Your Business).

Interesting to note, that forty-four days after Neil Armstrong and crew landed on the moon, the first US ATM machine went live. People easily and gladly accepted the concept that humans had travelled to another celestial body. However it took many years before it became common practice to do your banking from a machine on a street corner. In those early ATM days it was difficult to build trust around anonymous consumer electronic transactions.

Key to the evolution of a Technology trust factor was the arrival of the smartphone. Smartphones brought acceptance because we learned to trust and now to depend on them. Our trust is based on the fact we tend to rely on them and they give us consistent results with a high-degree of quality.

The devices are also highly capable enablers of the other aspects of a financial transaction. There are three primary concerns that mobile devices solve for a transaction authentication, verification and non-repudiation.

Smartphones enable multi-factor authentication via something you know (a password), something you have (a digital certificate) or something you are (a fingerprint via bio-sensor). Today’s devices make multi-factor authentication an almost trivial interaction at a relatively low price point. Verification often comes in the form of certificates that validate a party is who they say they are.

Another key to the financial transactions is something known as non-repudiation. Simply put it means that the digital transaction was not altered from the time it left the sender to the time it was decoded by the receiver. These were designed to work in a point-to-point or peer-to-peer network. However, financial transactions often involve multiple parties so the networks must evolve to accommodate a network of payees/payers.

In traditional scenarios verification of the sender’s identity received the majority of attention. For DPNs to receive universal adoption, the addition of verification for all parties involved must be assured.

Smartphones also connect to a variety to networks. While traditional Internet still rules, Near Field Communications (NFC) and Apple’s new iBeacon are alternatives that broaden choices for end-users. These “close-by” technologies are analogous to a cash transactions between two parties.

(Examine) Who benefits?

Today the New Normal of digital cash comes from companies with familiar names such as PayPal, Square, Dwolla, Bitcoin and GoPayments. Each of these payment networks brings different advances and challenges. The common thread is that each has found a way to enable consumers outside of traditional payment methods. These new payment models work outside of the traditional payment networks. Transactions occur over a proprietary network and generally enabled via mobile device. They provide end users and businesses an alternative method for exchanging payments.

They are the next generation bank and credit cards providing access to payments at both the traditional and micro-payment (generally less than $15 USD) level. Micropayments are not considered viable over traditional networks. In parallel the rise of crowd sourcing for businesses has benefited from this new trust.

It may be counterintuitive but the better the technological and wider social acceptance benefits those who have less. Technology enables lower cost of transactions, enabling micropayments to a wider socio-economic audience. The rules for underwriting payments or credit are re-structured to provide alternative lending for those who are unable to use or qualify for traditional access to credit.

(Prepare) Where Do We Go From Here?

Follow the money to the value-trail. Just as in the gold rush of the 1800’s it is the providers of the shovels and provisions (infrastructure and partner companies in today’s terms) are the ones who benefited most. Transformation in the payment infrastructure has collateral effects. As an example Boston based Circle Internet Financial recently raised $9MM in funding. The company is developing a service to aid in the adoption of Bitcoin and other digital payments.

Since transactions occur at the point-of-service rather than a traditional point-of-sale (traditionally tied to a physical location (even if that location is a desktop)) endpoint devices become key to practical and common acceptance. With short (e.g., NFC) and long range network protocols built into mobile devices, transactions occur at any given time. A specific place is no longer required. With the rise of the Internet of Things (see “Jailbreaking the Internet: The Shape of Things to Come“) the number and type of endpoints is vast.

The next killer app/appliance is a Secure Payment Broker (SPB) for your mobile device. A SPB enables you to make and receive payments over a multitude of networks while securing accessing your financial assets. The payment is secure, reliable and is managed by a set a rules. Those rules are ones that the individual payment holder creates and manages. Perhaps there are time and location-based rules (e.g., only spend x dollars at the electronics store). You would be able to access all of your financial assets according to different rules. Those rules could be extended to others (e.g., children’s allowance).

(Satisfy) Does Trust Change the World?

Evolutions of Digital Payment Networks create bold opportunities. Fast-forward ten years to the potential of a network of seamless interconnected universal payment systems. A universal payment system connects the world in an unprecedented way. Access to credit on a more even socio-economic footing changes the way we develop as people.

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